Event Risk on Tap

Price Action

USD/JPY drifts to 78.20

AUD/USD reminas realtively bid at 9730 despite rate cut

GBP/USD pressured lower to 1.5330

EUR/USD unwinds rally back to 1.2425

EUR/USD unwound all of yesterday’s rally in early European trade today as concerns over Spain returned to the forefront dampening investor sentiment once again. Spain’s Budget Minister Cristobal Montoro said European “institutions” should help shore up the nation’s banking sector. “That’s why it’s so important that the European institutions open up and help us achieve, help facilitate, that figure because we’re not talking about astronomical figures,” he said.

Montoro also said European leaders should approve a “banking union” at their summit at the end of the month. He reiterated the Spanish government’s position that the nation won’t need an overall bailout, saying it’s “technically” not possible to rescue Spain. Although his comments were meant to reassure the market, they had the opposite effect sending the euro lower by more than 70 points as jittery currency traders viewed Mr. Montoro’s statement as further confirmation that Spain may be headed for credit crunch disaster.

Today the emergency meeting of EU finance ministers called to discuss some of the key fiscal proposals such as a bank rescue fund and deposit insurance for the region may provide some much needed relief if it results in concrete policy proposals. Meanwhile as further evidence that the EZ is slipping into a recession the latest Retail Sales figures showed a decline of -1% versus -0.1% and year over year drop of -2.5%. Retail Sales fell to their lowest level since the end of last year, declining in all except Germany. The biggest drop came non-food items suggesting that large scale discretionary spending is clearly decreasing.

Elsewhere the RBA cut its benchmark rate by 25bp to 3.50% but the move was widely anticipated having little negative impact on the Aussie. In fact the pair rallied in the aftermath of the release on short covering flows before succumbing to the overall risk aversion sentiment as it settled below the .9750 mark.

In its statement, the RBA said that recent indicators suggested "further weakening in Europe and some further moderation in growth in China" weighed on its decision to lower rates as it continued to ease monetary policy. Attention will now turn to the GDP and employment figures due later in the week as markets try to gauge the extent of the slowdown in the region.

In North America today the focus will turn to the ISM Services number expected to remain relatively steady at 53.6 versus 53.5 the month prior. However, given the weakness in the US labor data chances are good that ISM may miss its mark as growth in the services sector continues to slow. If the Ism data disappoints it could trigger further selloff in risk with EUR/USD retesting its recent lows near the 1.2300 level.